For the Sake of Convenience: What are the 5 Most Popular Types of Loans?

There are many varied reasons and circumstances where you might need to borrow some money and take out a loan and there is a range of different lending products available that are designed to meet your needs.

Knowing which loan to apply for and what type is the most suitable and appropriate is not always straightforward but it pays to get it right and it is important to understand what type of loan you are applying for.

Here is a look at the most popular types of loans and an overview of their key features and purpose, including details about secured lending, and all about signature loans, where no credit check is required.

Buying a home

Let’s start with the biggest loan you are ever likely to apply for in your lifetime, a mortgage.

A mortgage is a loan that is designed to help you buy your own home and it is designed to allow you to purchase a property where the purchase price is much higher than the amount of cash you have available.

It is a long-term loan that allows you to spread the cost of buying the property over a period of time. A typical mortgage will be from 15 to 30 years in duration and the amount you owe will decrease as you continue with your payments, which is a process known as amortization.

By the time you get to the end of your mortgage period, you will have repaid the loan and interest charges in full and you will have an asset in the form of a property that is, hopefully, worth more than you paid for it in the beginning.

You will be required to contribute a downpayment against the total you are paying for the property, typically about 20% of the purchase price, which provides equity in the property.

The loan is secured against the property and if you default on your payments you could lose your deposit and your home will be subject to foreclosure.

To get a mortgage, you will normally have to demonstrate that you have a regular source of income and a good credit record.

Personal loan

Your credit history is often highly relevant to the consumer loan products that you are eligible for and it is always a good idea to check what your credit score is before you apply for a loan, especially if you have a record of missed payments and defaults.

The higher your credit score, the more chance you have of being granted a loan and paying a lower interest rate against the amount you are borrowing.

However, it should be noted that personal loan products are extremely varied and you can even find loans that offer you the money more quickly than traditional banks without the need for a credit check, although the interest rate charged will reflect the risk to the lender of offering finance without a credit check.

You can apply for a personal loan to fulfil a wide variety of purposes, such as wanting to borrow money to carry out some home improvements, take a special vacation, or to consolidate your borrowings.

Personal loans can be unsecured, which means you don’t have to offer any asset as collateral as you do with a mortgage, or there are loan products that are secured against an asset. An auto loan, for example, uses the vehicle as collateral and it can be taken back from you if you don’t make the payments.

Buying a car

The main point about a personal loan is that you should work out your finances and decide that you can afford the repayments, then choose a product that suits your needs and circumstances.

An auto loan is a popular way to finance your motoring needs.

The typical term for an auto loan is between 24 to 60 months and it often depends on the age and value of the vehicle when it comes to how long you get to repay the money borrowed against the value of the car.

Cars depreciate in value and if it is being used as collateral there is a risk to the lender that it will be worth less than they are owed, hence the reason to restrict how long the loan period is.

A new car that is of a higher value can often be paid over 48 to 72 months, whereas an older car will normally require a shorter repayment period.

You should be mindful that if you default on an auto loan the lender can still pursue you for any money still owing on the loan even after they have seized the vehicle. This is another good reason for being sensible about how much you borrow and how long you take the loan out for, bearing in mind that cars drop in value as they get older.

Student loan

A number of us will have to consider the option of taking out a student loan to pay for the education we need in order to get the qualifications required to start a career.

Most students tend to take out federal student loans with a fixed interest rate and terms that means you don’t have to repay the debt until after you have graduated.

There are caps on federal loans and this could result in a shortfall in the amount required to complete your education. In these circumstances, you can apply for a personal loan, but you should note that the interest rate will be variable and, therefore, it could go up or down, which is something you need to be prepared for.

Credit cards

Finally, it is relevant to consider credit cards as a type of loan as you are being offered a line of credit which you can spend when and how you like, within reason.

The fundamental difference with credit card borrowing is that there is no fixed term for repayment and this could result in you accumulating a debt balance that takes longer to repay than a conventional loan repaid over a specific period.

If you need money for a specific purpose it pays to check out whether a personal loan could be a better option as interest rates on credit cards can be high.

Consumer loans are often flexible and convenient, and if you use them in the right way it can allow you to get on with your plans.